Student loans function like any other loan, with paying on time being good for your credit. Likewise, late payments are bad for your credit score — although there is some leniency with student loan payments because lenders usually offer grace periods before reporting a late payment.
Lenders report the student loans you pay in installments to credit bureaus, which you have the right to check. You can monitor your track record by visiting AnnualCreditReport.com, which keeps credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. Since the pandemic began and until April 2022, you can check these reports weekly for free.
If you consistently pay your student loans on time, you can build your credit. Here’s a closer look at how student loans can affect your credit.
Building Your Credit
Like we said, consistent on-time student loan payments are good for your credit score. Credit bureaus record your regular timely payments, so if you ever need to apply for other loans in the future, you could pay less interest when you have a solid record.
Take note, we said future loans. You don’t necessarily need a good credit score to get a student loan, especially for federal student loans. Federal loans don’t require a credit check.
Private loans are another story. These types of student loans usually require a parent with good credit for applicants to qualify for a private student loan. Lenders also perform credit checks to confirm your eligibility for their private loans, making a good record helpful if you want a lower interest rate.
Speaking of parents, if they took out the loan in their name to help with your school fees, it’s their credit score that builds. If you took out a student loan in your name with your parents as co-signers, then both your credit scores build.
Late Payments and Pausing Payments
We mentioned a grace period and leniency when it comes to paying for student loans. Before a lender reports your late payment to any or all major credit bureaus, they allow at least a month of extra time for you to catch up with payments. This grace period depends on the type of student loan you applied for.
For federal student loans, servicers usually allow up to three months of extra time before they report a late payment, while private student loans usually only have a 30-day grace period. Once your lender reports you to a credit bureau, your credit report will get marked with delinquency for seven years.
Should you face serious financial problems, you can change the terms of your student loan without hurting your credit. If you have a federal student loan, you can apply for an income-driven repayment plan. You can ask your lender of private student loans if they offer modified repayment plans. There also are deferment or forbearance enrollment options for temporary payment pauses.
As you now know, student loans work just like other loans. Timely payments are good for your credit score. You can also obtain a much lower interest rate with a higher student loan credit score.
Meanwhile, late payments will hurt your credit score. Even if you can’t pay exactly on time, most lenders offer grace periods of up to 90 days before reporting a late payment to the credit bureaus. If you really can’t pay within the extra time allotted, there are options to have your monthly payments paused.